Why are REOs and HUD-owned properties sold so cheap?

Question

bank-owed (REO) and HUD-owned properties are sold much cheaper than other properties. What do you think mainly causes this difference?

Because they are not well informed about the market? I mean, In theory their agents always have ways to persuade them to sell fast at lower prices, just to secure the commision.

Or they are motivated by themselves to sell cheaper but faster?

Any thoughts are appreciated.

Chris Martin · Answer

Go to a car auction and buy some repo products there. The products there are inferior to retail sales and the price reflects this fact.

Bill Patterson · Answer

Hi,
There has been discussion on why agent owned homes sell for more and stay on the market longer.  One theory proposed is that the system of paying an agent a percentage of the sale price as the fee for selling the property can cause some agents to advise taking a lower offer rather than the extra time and work involved in squeezing a couple more percent out of the sale.  Think of it this way....a $200,000 house with a 3% commission to the listing agent would be a $6,000 fee.  To continue to market, show, and all of the other work involved to keep it on the market for another 2 weeks or a month to get $210,000 would net the listing agent only $300 more.  If it is their own house, they get $10,000 more!  Now, as a Realtor, I would say that my fiduciary relationship with the seller may not cause me to risk advising a seller to look for the last bit of $$$ they may squeeze out of the deal.  What if another buyer did not make an offer?   If it is my house, I can justify the risk!

The other part of your question speaks to "Distressed" value vs. "Retail" value.  We all know the lender doesn't want the house and there are probably deferred maintenance issues (at the very best!).  That helps explains why a well kept, retail priced listing with the seller not forced to move may have a higher eventual sale price.
Bill

Mark Updegraff · Answer

Have you been in any HUDs or REOs?  There is a serious difference in the quality of the home.  From my experience with REOs it looks like it is up to the discretion of the brokerage that is handling the property.  Most of the time the bank holding the paper isn't local.  They rely on "area experts" to price the property.  I think the price (cheap or expensive) is due to the broker's opinion.  For HUDs, I'm not sure where the initial valuation comes from, maybe they send someone out to look at it? maybe a broker?  In my neck, REOs seem priced more appropriate and HUDs are a little higher.  The HUDs sit on the market and reduce the price in accordance with their schedule, and don't counter offers with anything but their number.  As time ticks, the price drops and when it gets low enough an investor buys it.  I've formed a good relationship with a brokerage that handles a lot of REOs.  This is good because I can let him know what I need, and he can usually convince the bank to start it in that ballpark.

Back to the question though.  The price difference is in the amount of work that is needed on a REO or HUD home.  They're usually DIRTY FILTHY WRECKS.  Not that they don't have potential... (eternal optimist)... but seriously, can't you just SMELL the difference???

Account Closed · Answer

They are not always sold much cheaper, just often are. Part of it is because they are motivated sellers. A motivated seller often doesn't have time to wait for market price and potential buyers are often looking at these properties to purchase at below market. The combination generally leads to sales at lower than market.

Multiple bids though can and do come up and sometimes these properties do sell at what is probably market value.

Michael Stole · Answer

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.137.3041&rep=rep1&type=pdf

The above is the address directly linked to that article in pdf formate. Here is a quote from their article.

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real estate agents have an incentive to convince clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired to when an agent sells his own home. Consistent with the theory, we find homes owned by real estate agents sell for 3.7% more than other houses and stay on the market 9.5 days longer, controlling for observables. Greater information asymmetry leads to larger distortions.

Mark Updegraff · Answer

FYI - that link is not opening in my browser.
Also, I don't understand what you're saying after the link.
Thanks, Mark

Michael Stole · Answer

The reason I asked this question is because of a research article written by two economists. The author also wrote the famous book "freakonomics".

http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.4.599

They find that agent-owned houses sell for 3.7% more than other houses and stay no the market 9.5 days longer. They conclude that agents are better informed, and exploit this informational advantage to convince their clients to sell too cheaply and too quickly.

But I don't completely buy their theory. I mean, for REOs and HUD-owned houses, banks and HUD may simply be more motivated to sell cheap and quickly, but not because they are fooled by their clients.

I would like to know what you guys think, as you guys are more experienced in this market.

Why are REOs and HUD-owned properties sold so cheap?

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